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The VirnetX Holding (VHC) Rocket Ship: Failure To Launch

by Sonya Colberg, TheStreetSweeper Senior Editor - 2/10/2016 9:59:42 AM

Shares of VirnetX Holding (VHC) have ridden an unfortunate rocket to the moon based on a court decision that Apple infringed on VirnetX’s patents. But we believe the share price will crater as soon as the market understands the massive risks:

1. The Trend: No Settling

Patent trolling firms used to nab larger companies by the tail. But now these companies are beginning to fight - and win - these lawsuits filed by patent trolls. Case in point is Better Mouse Company's patent suit against SteelSeries.

Better Mouse apparently attained the title of “patent troll” because the company began buying up patents and launching patent lawsuits shortly after it was formed, according to Forbes. Before long, Better Mouse's chewing paid off as companies eager to push aside the pesky little troll coughed up $1.2 million just to settle matters.

But jurors jerked away Better Mouse's cheese on Jan. 14. They rejected the company's patent infringement claims against SteelSeries.

So will Apple really meekly hand VirnetX $625 million? That's unimaginable.

In fact ...

2. Many Years Before VirnetX Pockets A Dime – If Ever

Apple immediately filed for a mistrial after last week’s verdict of infringement on four VirnetX patents in products such as FaceTime and VPN services.

And VirnetX’s attorney said he thinks it could take several more years to resolve the case that began six years ago, not near VirnetX's Nevada headquarters but in Tyler, Texas, "the patent litigation capital of America."

Meanwhile, VirnetX knows all too well that after spending countless hours and dollars litigating, cases sometimes go the wrong way. The company filed a $258 million patent lawsuit against Cisco in 2010 with what may have seemed to VirnetX astonishing results. In a stinging 2013 verdict, jurors determined Cisco had not infringed on VirnetX patents. VirnetX investors raced to the exits and shares plunged 28 percent.

     3. Microsoft Outcome Disappointing

Even when a lawsuit ends up being settled to VirnetX's favor, the results aren't as beneficial as we would hope. VirnetX won a March 2010 $200 million settlement against Microsoft. Yet, the lead counsel whacked away $20 million plus expenses; taxes took $34 million; and partner Science Application International Corp. $59.24 million, with more obligated.

Ultimately, the Microsoft windfall turned out to be a gentle breeze resulting in VirnetX receiving only about $63 million... Though the settlement did manage to push the negative earnings into a positive 91 cents, the company ended up with just 31 percent of the settlement.

     4. VirnetX Churns Out Misses, Massive Losses

But the company soon returned to negative earnings and double-digit and even triple-digit misses, as shown below.

Earnings History Jun 13 Dec 13 Jun 15 Sep 15
EPS Est                                0.06                                -0.10                                -0.09                                -0.10
EPS Actual                               -0.14                                -0.15                                -0.18                                 -0.12
Difference                               -0.20                                -0.05                                -0.09                                 -0.02
Surprise %                          -333.30%                            -50.00%                           -100.00%                             -20.00%

(Source: Yahoo Finance)

Those results also help explain the absence of analyst coverage and the heavy institutional selling.

 

  Holders Shares
New Positions 5 192,886
Sold Out Positions 17 3,394,813

Click on the column header links to resort ascending (?) or descending (?).
Owner Name Date Shared Held Change (Shares) Change (%) Value (in 1,000s)
VANGUARD GROUP INC 12/31/2015 1,538,433 (21,914) (1.4) 11,246
BLACKROCK FUND ADVISORS 09/30/2015 1,178,372 (13,365) (1.12) 8,614
BLACKROCK INSTITUTIONAL TRUST COMPANY, N.A. 09/30/2015 1,132,932 (91,645) (7.48) 8,282

(Source: Nasdaq. Click to see entire listing)

A snapshot from the 10-Q, below, offers a look at the company's ongoing abysmal financial condition:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

2015

 

 

September 30,

2014

 

 

September 30,

2015

 

 

September 30,

2014

 

Revenue

 

$

375

 

 

$

292

 

 

$

1,150

 

 

$

809

 

                                 

Net loss

 

$

(6,097

)

 

$

(4,468

)

 

$

(21,498

)

 

$

(17,227

)

(Source: Company SEC filing)

Yet even in this financial environment, the two top executives are pulling down $2.8 million in compensation.

(Source: Salary.com from 2014 SEC filing)

Never mind that, with only $375,000 in revenue and $6 million in net losses last quarter, the company had to squeeze $741,000 from its ATM in order to keep operating.

At-the-market financing? Oh, yes...

      5. Insufficient Cash To Await Resolution: Potentially Dilutive Stock Sale Looms

Everywhere we look, the company's financials should effectively blow away any lingering investor hopefulness that the company can hold out until the Apple issue is resolved.

At the end of September, the company had less than $10 million in cash. Yet it burns through about $7.25 million per quarter.

So VirnetX should be almost out of cash now…

Therefore investors must watch for a stock offering brimming with potential dilution.

In fact, the company has already set up a stock offering.

Through an at-the-market (ATM) offering in August, the company cleared the way to unleash millions of shares onto the market on a whim.

Is there even more related risk? Better believe it. Oh, yes. Options for more than 4 million shares are exercisable at this very moment.

Conclusion

It's not too shocking that under eight different methodologies for determining a stock's trading quality, VirnetX rated as low as 0% with the vast majority marking the company only about 20% ... one of the very worst scorecards we’ve ever seen, shown here.

But the rating is justified because VirnetX doesn't even qualify as a real company, in our book. Its consistent losses have already swept in a whopping $122 million deficit, on top of a 35 cent book value that cannot logically equal that screaming $400 million market valuation.

Its business plan results in the company stumbling along, apparently with nothing more ambitious than patent trolling. We think patent trolling is the kind of "business" that merits a near-term stock price of $4.25 ... a very fair valuation for VirnetX.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in VHC and stand to profit on any future declines in the stock price.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org.

 

  

 

 

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